The science of demand

New hotels will still create new demand, helping to draw in the crowds, but perhaps a little slower than before.

Viability director Guy Wilkinson says that we should not mock the mantra “build it and they will come”, but also advises adopting a more realistic outlook concerning future growth.

Build it and they will come.” This has been a reliable mantra for GCC hotel developers over the last few years.

But even in the heady days of the boom, the phrase was often used ironically by cynical observers to imply that a tad more planning might not have gone amiss, and that simply jumping on the bandwagon was not sufficient justification for a swathe of multi-million dollar hotel projects.

In hospitality consulting circles, we prefer to refer to ‘supply-induced demand’, also known as ‘created demand’. It means the same as ‘build it and they will come’, but has a bit more science to it.

It refers to the two possible reasons that hotels can attract guests: either because people are already in the local market, looking for a hotel room; or because they’re in another market, and can be viably enticed or channelled into a local hotel room.

A new hotel may, therefore, either take a slice of the existing pie, at the expense of the previously existing properties, or else make the pie bigger.

One way it would do the latter is by taking up the slack of frustrated demand. Also known as ‘displaced demand’, this may be defined as demand not currently satisfied by other hotels, due to under-capacity at peak periods, for example, or lack of rooms of a specific standard, causing potential guests to stay outside the market area.

Story continues below

For example, when the first few Grand Prix events took place in Bahrain, such was the supply-demand equation that some people were forced to stay in Dubai to attend.

This is also an example of supply-induced demand, which may be defined as new demand that would not otherwise have been attracted to the area, resulting specifically from the opening of new and especially-branded properties, as well as tourism marketing initiatives by local government, and similar circumstances.

The staging of the Formula 1 certainly succeeded in boosting tourism activities of all kinds in Bahrain, including hotel occupancy, just as it is now planned to do for Abu Dhabi.

Enlarging the pie
However, supply-induced demand most commonly refers to the launch of individual hotels that succeed in enlarging the pie, rather than slicing it more thinly.

Often, as part of a hotel feasibility study, we will perform what is known as a fair share analysis, in which we anticipate the future market-wide level of hotel room occupancy by comparing assumed levels of future room-night growth, with known and estimated future additions to the rooms supply.

Let’s say you have a small market consisting of half a dozen hotels. Another half a dozen are planned to open over a similar number of years. What would you expect to happen? Obviously, the pie will become more thinly sliced and occupancies will fall drastically, right? Not necessarily.

In reality, we know that drastic reductions do not usually occur, thanks to the very real effects of displaced and supply-induced demand.

In a market of just six hotels, there may well have been frustrated demand in peak seasons and due to the existence of sub-standard properties. Equally, while hotels that are newcomers to the location will certainly be newer and shinier, that may well provoke the older properties to refurbish and upgrade to remain competitive.

The existence of more and better hotels may create a hotel ‘destination’ that didn’t exist before — especially if it is a stretch of beach, for example, which may then become known as a ‘riviera’ and start to be featured in international brochures.

Bring in brands
Above all, it is the addition of branded hotels run by international chains that can induce new demand to a location, thanks to their use of international market networks,
GDS, websites, etc, that were not previously sources of demand there.

Thus, it is not entirely appropriate to mock those who believe that if you build a hotel, the guests will come. The effectiveness of this approach has been proven time and again in the Gulf over the past few years.

For sure, guests won’t materialise like magic, but equally, you can’t expect to attract more guests to a destination without adding more hotel rooms.

Now that international hotel demand from both corporate and leisure sectors is shrinking, however, the scale and pace of supply development in the GCC must surely also slow.

New hotels will continue to be able to create new demand, but this ability must be seen in a realistic perspective and less sensational results must be expected. It is a phenomenon that works just as well in markets that are growing gradually and on a small scale, which is probably how things should be for the foreseeable future.